Rebuilding credit is like restoring reputation. It can be damaged easily and take years, even a decade, just to get to that ‘safe place’ you were on the first time. Once you’ve scored low on the bank’s expectations, make ready to play the waiting game on the long road of contrition. If you think shortcuts are an option, you’re starting on the wrong foot. Quick fixes are the most likely to backfire. Below we’ve listed a few steps to follow on the ‘How to rebuild credit’ path.
How to Rebuild Credit When Bank-discredited
How to Rebuild Credit: Step No.1 – Check Your Credit Report
Credit reports are the first to be overlooked. Many of us entrust the bank with keeping track on us error-free. So we rarely request copies of our reports and do our own fact-checking math. However, oversights happen more than we might think. And the last you want is to be penalized for mistakes you didn’t make.
In 2012, the Federal Trade Commission revealed that about one in four Americans who did monitor their credit reports found at least one potentially costly mistake in the data. Some of the most common errors include:
- Account-linked errors – A loan or credit card listed that isn’t yours. Or an account closed by you, but listed as closed by the bank.
- Derogatory mark errors – A paid-off tax lien more than seven years old or a collections account incorrectly listed as unpaid.
These errors can further hurt your credit score, so if you spot any, make sure you dispute them with credit bank. You are entitled to receive one free copy of each of your three credit reports every year at annualcreditreport.com.
How to Rebuild Credit: Step No.2 – Catch Up on All the Missed or Overdue Payments
If punctuality counts for anything, it’s in making your credit payments on time. An ideal credit history scores no missed payments on any of your accounts. Lenders will penalize you with a low credit score if your payments register as 60 days due. If you hit the 120 days mark, the collection agency will take over the problem.
You wouldn’t want a state bounty hunter breathing down your neck all the time, but they are not your top priority. The real repercussions will come in the form of that dreaded low score. If you leave yourself in debt to the lenders, 7 years will have to pass until you can rebuild your credit.
Let’s say you’re absent-minded and money management is not your forte. If the problem is disorganization, you could enroll for the automated reminders.
Thus, the necessary amount will be automatically deducted from your checking account every month. Remember, you need to rebuild credit confidence. Even if you don’t particularly enjoy the idea of putting the bank on a monthly payroll.
How to Rebuild Credit: Step No.3 – Reduce Chronic Debt by Keeping Balances Low
If the long-overdue mountain of bills tours overwhelmingly over your head, you can enlist the help of your creditors or a counseling agency to work out a plan to delay or even restructure your payment terms.
Everyone has hard times making ends meet. However, putting pressure on your credit card to relieve you of short-term stress will affect your credit score long-term. These might be the harshest words you’ll ever hear in your life, but stop using your credit card.
Reducing your debt starts with not adding more to it. If you’re carrying balances on multiple cards, pour as much money as you possibly can in the account with the highest utilization rate – meaning the amount of available credit you use. One step in raising your credit score fast is bringing the utilization rate down by 30% or below. Just because you have more credit doesn’t mean you have to spend it.
Moreover, tackle overdue bills like rent or utilities. As mentioned earlier, when you are rebuilding credit, you cannot afford to miss any payments.
How to Rebuild Credit: Step No.4 – Pay Down Revolving Debt & Avoid Closing Unused Credit Cards
As stated above, the most time-efficient way to rebuild credit scores is by paying off debt rather than moving it around. Avoid closing credit cards as a strategy to raise your scores. What matters is the amount you owe as a percentage of your total line of credit. Plus, the length of your credit history might suffer as well if you decide to forfeit a credit card you’ve had for a long time. One safer tactic is to switch to a card without an annual fee, for example.
How to Rebuild Credit: Step No.5 – Don’t Open Even More Credit Cards
Furthermore, if you think opening a number of new accounts in a short period of time will ease the load of your loan by increasing your available credit, you’re only thinking short-term. This strategy will be most damaging in time and further hurt your credit score.
How to Rebuild Credit: Step No.6– Get Yourself a Secured Credit Card
You’ve already discredited your credit score. In that case, the lender will most likely not approve for an unsecured credit card with the enticing offers on display like lucrative rewards or high limits.
One way to start anew on the road to rebuilding credit is with a secured credit card. If your bank allows you to open one, you’ll have to deposit money up front as collateral. The amount will be equal to the credit limit. Other than having this gesture of goodwill required of you, the secured credit cards work just like a regular credit card. Actually, consider this your test.
If you want to be allowed future access to a miles credit card for travel, for example, you need to prove you’ve learned your lesson. The bank will still report your payments on a secured credit card to all three major credit bureaus. If you keep up-to-date and don’t slip into bad habits again, this is how to build credit responsibly and diligently. Again, make sure you don’t overuse your credit limit. Keep the 30% mark.
If you’re recovering from bankruptcy and creditors hold a particular reason in not trusting your payment capacities, you might need a co-signer to qualify even for a secured credit card.
Best Credit Cards to Restore Your Score
However, let’s stick to the best possible scenario. A few months of timely payments have passed and, sure enough, once again you may upgrade to your former unsecured credit card. You’ll receive your collateral back and regain some of those lost points on the credit score table.
Try first in the department store area. Fish around for the easiest cards to qualify for. In half a year, even a bank might take you on your word and restore your credit card privileges.
Building credit will require discipline and patience. It might also feel a bit offensive having your mistakes flaunted at you interminably by creditors and banks.
It shouldn’t be about how to rebuild credit, but how to walk that thin line between managing your accounts responsibly and using your credit line to suit your needs. Otherwise, the penalties of fixing a poor mark on your report will weigh even heavier on the long term. It can affect insurance premiums or even draw a black mark on your resume when you’re applying for a job.